More tax incentives are on the cards for infrastructure bonds. Even the interest paid on borrowings for investment in specified tax-free infrastructure bonds would soon be allowed deductions, as per a policy being finalised by the finance ministry.
Currently, interest earned on investment in tax free-bonds issued to finance infrastructure project are tax-exempt.The new move would allow corporates and other institutional investors who borrow funds to invest in these bonds which have not fared in tune with the policy-makers' expectations.
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Sources privy to the matter told FE that what is being considered is a carve-out from the Section 14A of the Income Tax Act, which currently does not allow deduction of expenditure, such as the interest paid on borrowed money for investing in these bonds, incurred by companies, while computing taxable income.
These bonds are issued by companies institutions such as NHAI, IIFCL, IRFC, HUDCO, National Housing Bank and SIDBI.
“The benefit of tax exemption on the interest on investments in the bonds is being offset by the Section 14A, which does not allow the cost of borrowing funds to make these investments to be deducted. This is the basic problem why institutional investors are reluctant (to invest in these bonds),” IIFCL CMD S K Goel said. He added that if the changes are made, the response to the bonds will be “very good.”.
The changes to the Income Tax Act are likely to be carried out through an official notification, sources said. “This (change in the IT Act) will help in channelising more funds from corporates to these bonds,” said Saurav Bhattacharya, associate director, PricewaterhouseCoopers India.
Institutions raised around Rs 30,000 crore through these bonds in 2011-12 and around Rs 25,000 crore in 2012-13.
The finance ministry had doubled the amount that can be raised through these bonds from Rs 30,000 crore in 2011-12 to Rs 60,000 crore last fiscal. This included